1. Field of the Invention
The present invention relates to real estate property investment techniques and more particularly, to the performance of audits for a plurality of real estate properties and in particular, to a method and computer program product for enabling substantially identical current net operating income audit practices among a plurality of audit firms so that resulting audits calculated by the firms can be efficiently evaluated by a common investment entity.
2. Description of Related Art
The determination of current net operating income (NOI) of a commercial property is a key factor in the underwriting process for new loans or modifications of existing loans. A general definition of the net operating income of a property is the income projected by the income-producing property after deducting losses for vacancy, collection and operating expenses. In more detail, net operating income for any period is the gross income less expenses, including property taxes, reasonable maintenance and operating expenses, and the amortized cost of capital improvements. Gross income is generally defined as the total of the gross rents lawfully collectible from a property, plus any other considerations received or receivable for, or in connection with, the use or occupancy of rental units and housing services (including other consideration such as, for example, from laundry, parking, or any other facilities or fees).
Net Operating Income (NOI) audits are performed as part of the due diligence process for most new investment transactions and to audit on-going property performance. Although an NOI audit can involve a variety of processes, typically, the NOI audit involves: 1) a review of all or a significant sample of leases, 2) a revenue reconciliation, 3) cash receipts testing, and 4) operating income and expense analyses. The findings disclosed during the NOI audit enable the investment entity to make a reliable determination of in-place net operating income, which provides the basis for a sound investment decision.
Usually, NOI audits are performed in connection with commercial properties such as, for example, office, industrial, retail properties and non-commercial properties, such as multifamily and self storage properties, although other types of properties can be involved.
A procedure found to be generally acceptable by the industry calls for NOI audits to be conducted after receipt of a signed loan (or equity) application and good faith deposit, but before submission of a request for credit approval. In such a procedure, transactions which are approved subject to the completion of NOI audits must have NOI audits completed and approved prior to initial transaction funding.
Depending on how the investment entity is organized, NOI audits may be performed by approved outside accounting firms, or audit firms, having a contractual relationship with the investment entity, so that the investment entity is able to meet its investment targets and cycle time objectives. In such instances, audit firms would be approved on the basis of, for example, staff size, qualifications of staff members, real estate experience, capabilities concerning turnaround time, and fees. Real estate deal leaders or due diligence coordinators of the investment entity typically provide the outside audit firms with all information and support which is necessary to conduct a complete and efficient audit. Conversely, the audit results delivered in return should conform to the investment entity's expectations and standards so that the results can be accepted with the presumption that all required parameters and assumptions are included in the underlying calculations.
This becomes a serious problem in instances where numerous audit firms are involved, each performing one or more respective property audits, and especially where each firm is geographically separate from the investment entity location and possibly philosophically at odds with the prevailing philosophy of the investment entity. Inevitably, individual practices evolve, or creep into, the NOI audit procedure conducted by contractor audit firms, the effect of which, in some instances, may be difficult for the investment entity to initially recognize, and may contribute to errors in investment judgment, as defined by the policies and objectives of the investment entity. Such individual practices, if not explicitly indicated, may remain undetected, or be misunderstood, during review and comparative evaluation by the investment entity. For example, undetected assumptions made in the underwriting NOI calculation might include, but are not limited to, lower than current occupancy rates, changes in tax liability, or growth of capital reserves. Such assumptions might be incorporated into the NOI calculation, but not given an appropriate level of visibility or notice and go undetected by the reader. This can lead to disastrous consequences in terms of evaluating potential real estate investment. On a more prosaic level, the format, arrangement, and content of the audit reports can vary widely among audit firms, leading, at least, to difficulty of review by the investment entity and inconsistency in results.
A primary object of the present invention is to provide a system and method for achieving uniform implementation of policy, procedure, current NOI calculation, and reporting among a plurality of audit firms having a reporting relationship with a common investment entity.
Another object of the present invention is to provide an NOI audit model, which includes an interactive computer program that makes readily available to the user during the performance of an audit, an audit policy, guidelines, detailed instructions and definitions, together with an NOI calculating module and a reporting module, that are amenable to orderly extension to accommodate unique aspects of one or more investment properties.
Still another object of the present invention is to provide in a single computer program a global audit model that includes a Current NOI calculation module and an Underwriter NOI calculation module which operate from a common data model.
A further object is to provide the global audit model of the present invention in the form of a product to be distributed over a network such as the Internet or by a recording on stored data media.